Opening statement
In the past, real estate ownership was primarily driven by its utility value, as it provided a place to live or a means for production. However, in today’s world, it has evolved into the foremost asset for preserving wealth, a role once held by traditional forms of money. This shift is a consequence of prolonged monetary inflation eroding people’s purchasing power, a trend that can be traced back to the “Nixon shock” on August 15, 1971, when U.S. President Richard Nixon announced the end of the U.S. dollar’s convertibility into gold. Subsequently, central banks worldwide adopted fiat-based monetary systems with fluctuating exchange rates, abandoning any tangible currency standard.
Since that pivotal moment, the money supply has continued to expand. Real estate has emerged as the preeminent choice for safeguarding wealth against the resulting inflation. Currently, approximately 67% of global wealth, roughly equivalent to $330 trillion, is invested in real estate.
Consequently, the costs of housing and the overall cost of living have surged. The advent of Bitcoin in 2009 reintroduced a form of sound money, offering an innate store of value. As it fulfills this role effectively, Bitcoin is poised to absorb the monetary premium that real estate has accrued over decades of monetary inflation, potentially causing housing values to revert to their intrinsic utility value. Bitcoin’s unique characteristics make it an ideal store of value; it boasts a finite supply, portability, divisibility, durability, fungibility, liquidity, resistance to censorship, and noncustodial nature. In comparison, real estate falls short when competing with Bitcoin as a store of value, as the latter is scarcer, more liquid, easier to transfer, less prone to confiscation, and more cost-effective to maintain. In the following sections, I will elucidate the profound implications this shift could have on the global financial system.
Real Estate, Interest Rates, and Financing
In addition to serving as a “savings account,” real estate stands as one of the most commonly utilized forms of collateral within the banking system. Consequently, it wields significant influence over lending practices.
Under a hard money standard, bitcoin is poised to supplant real estate in this capacity. Bitcoin’s inherent attributes encompass many of the value propositions offered by real estate, while also offering more robust security, lower custody costs, and greater accessibility. As a bearer instrument, it serves as pristine collateral, and we’re already witnessing the emergence of various Bitcoin lending products.
In the grand scheme of things, bitcoin is likely to supplant real estate as one of the foundational assets within the global financial system. This transformation would also have a profound impact on housing costs, lending procedures, and interest rates, as these variables are intricately interconnected. In the ensuing discussion, I will delve into the intricate details of how these changes might manifest.
The Practical Value of Housing in a Bitcoin-Based System
The same market dynamics that influence the prices of all goods, supply and demand, will also determine the practical worth of a house in a Bitcoin-based system. In a free-market setting, the cost of housing in an exchange corresponds to the highest utility an individual can obtain for the money they are willing to part with to secure shelter and avoid homelessness.
Housing represents a specific fraction of the overall range of available goods, and as market ratios fluctuate, property prices will adjust accordingly. These prices are linked to the proportion of an individual’s wealth they are ready to allocate for housing relative to the resources earmarked for other economic expenditures. The subjective value assigned to housing varies from person to person.
For instance, some may be willing to pay a premium for a prime location. The decision to construct, purchase, or rent a property hinges on personal preferences. It is challenging to predict the precise degree of financialization. However, it is likely to be considerably lower than current levels since people can naturally save in bitcoin, eliminating the need for investments to counter monetary inflation. The market will organically regulate these dynamics.
Construction in a Bitcoin-Based Environment
In a general sense, deflation tends to reduce construction expenses, making it more feasible for a broader segment of the population to embark on home construction projects. Nevertheless, akin to any industry, specialization and the division of labor will prevail. Entrepreneurs can earn returns (rent) by assuming risks and investing their time and capital in the creation of a house, which they can subsequently lease to tenants. Ludwig von Mises termed this concept “originary interest,” denoting the profit margin between the costs of production factors and the expected income from the eventual sale of the completed property.
The cost associated with constructing a house is contingent on factors such as material costs, labor expenses, and a reasonable profit margin for the builder. The size and location of the land also exert an influence on the overall price. Thus, constructing a house would be a viable option for individuals possessing the requisite skills or those who have the time and a penchant for it. Naturally, for those unable to undertake construction themselves, purchasing or renting property would be a more practical choice.
Purchasing in a Bitcoin-Based Environment
Real estate prices will ultimately be contingent on the interplay of supply and demand. If individuals are willing to pay a premium for factors like location, they will do so. Price variations from the norm will naturally result from market forces. In the broader perspective, housing price trends will become more closely linked to fluctuations in population and the scarcity of land. Currently, land scarcity is largely artificial, owing to government regulations, such as zoning laws.
It’s plausible that regulations will persist since municipalities and similar entities have an interest in shaping the appearance of buildings, but these regulations are likely to be less restrictive compared to the present scenario.
In a general sense, housing is expected to be more affordable, primarily because the degree of financialization will be markedly lower, and prices are likely to experience deflation over time.
When considering the purchase of a house, one should take into account the opportunity cost of rent, as owning a house for personal use entails the foregone opportunity to rent it out for additional income.
Renting in a Bitcoin-Centric Framework
A significant determinant of the average rental costs within a specific geographical area will be the average disposable income of households in that vicinity. Over time, rental prices would organically evolve within the market. This is a multifaceted topic. According to Ludwig von Mises, rent does not pertain exclusively to the income generated from land; rather, it is a market phenomenon in which entrepreneurs, willing to assume risks, invest capital in constructing a house to yield originary interest, which represents the inherent rate of return in a production venture. In essence, rent signifies the percentage surplus of total revenues over total expenditures. When opting for renting, the extra funds saved by not purchasing a house can be redirected toward other more pressing priorities, such as financing a business or saving for the future.
Bitcoin Standard Interest Rates
In a free market operating under a stable monetary system, the prevailing interest rate is determined by a multitude of factors, with a primary emphasis on the interplay between the supply and demand for capital. When the supply of capital surpasses the demand, the market interest rate declines, while it ascends when the demand outstrips the supply. Consequently, the market interest rate represents the price at which capital is transacted within the market.
In this context, a natural concept known as the net interest rate emerges, akin to other financial indicators such as average rental rates. In a system characterized by sound money, it is reasonable to expect that the average rent closely approximates the risk-free interest rate, with an adjustment made to account for inherent risks. After all, rental properties carry inherent risks, such as potential damage and unpaid rent. While insurance can mitigate some of these risks, it comes with additional costs. Hence, the risk-free interest rate is presumed to reflect the general time preference of individuals within the economy.
Contrastingly, in a fiat monetary system, the risk-free interest rate is intricately linked to inflation. For instance, a US Treasury bond offering a yield of 5-6% is considered risk-free, largely due to the fact that the yield theoretically compensates for the erosion of purchasing power experienced by fiat currency over time. Additionally, the risk-free interest rate in fiat money incorporates the minimal risk of a nation defaulting on its obligations, which is generally perceived as improbable since states can essentially create currency in perpetuity.
Conversely, in a Bitcoin-based monetary system, the risk-free interest rate component centers on the risk of losing bitcoin when held in self-custody. This risk is notably less compared to the historical inevitability that fiat currencies will eventually depreciate to worthlessness, a factor often overlooked in the risk-free interest rates of fiat markets. When bitcoin is securely stored in cold storage, it remains under the sole control of the owner and is immune to confiscation or erosion in value due to third-party actions.
The risk-free interest rate for bitcoin is inherently tied to its productivity. Given that bitcoin is finite in supply, the value of individual units increases as human productivity (as represented by stored value in Bitcoin) expands. There exists a risk of missing out on the appreciation in the value of bitcoin (deflation) in the event of a loss. This risk is accentuated by a greater overall productivity within the economy. Consequently, the interest rate on a loan in a Bitcoin-based system would likely encompass the deflation rate, with an added risk premium to compensate for the potential loss of bitcoin.
Loan Practices in a Bitcoin-Based Monetary System
In a finite cryptocurrency like Bitcoin, the need to generate additional returns, as seen in inflationary fiat currencies to offset purchasing power losses due to monetary devaluation, becomes unnecessary. Instead, Bitcoin’s value fluctuates in accordance with economic output, adapting to the economic landscape. Its price responds to expected productivity gains by rising and adjusts downwards in response to anticipated losses, such as those resulting from natural disasters.
Lending Bitcoin presents a significantly lower incentive, as there’s little benefit in risking potential losses due to deflation without adequate compensation. Consequently, interest rates are likely to be notably higher, leading market participants to carefully weigh the pros and cons of lending and borrowing.
For lenders, the consideration revolves around the risk of substantial loss in purchasing power if the borrowed Bitcoin isn’t repaid. Hence, they would require substantial collateral to guard against the default risk, which can have severe consequences in a deflationary setting. Borrowers, on the other hand, must factor in the interest to be paid and the challenges of repayment in the face of deflation.
From the perspective of a Keynesian economist, this might appear to create an economic standstill. However, it’s actually beneficial when there is a level of risk associated with taking out a loan. This scenario is likely to foster a healthier market environment and promote genuine innovation, as people won’t pursue economically unviable ideas. Consequently, there will probably be fewer superfluous companies thriving on easy money, a common occurrence in a fiat currency system.
Furthermore, the demand for real estate investment loans would diminish, as individuals can save in Bitcoin. This shift would transform the home buying experience, rendering much of the existing financial infrastructure around real estate, including brokers, less relevant, and leading to its partial disappearance.
Bitcoin As Collateral
Under a hard money standard like Bitcoin, individuals are not compelled to borrow in order to keep up with escalating prices resulting from depreciating currency. In fact, under such a monetary system, it is anticipated that prices would tend to move in the opposite direction, potentially leading to deflation. Nevertheless, there are still situations where borrowing remains valuable, such as when someone urgently requires funds to seize an entrepreneurial opportunity. Entrepreneurship frequently demands prompt access to capital for transforming a business concept into reality. Commencing a business often necessitates more funds than one’s savings can cover, and it is generally ill-advised for an entrepreneur to deplete all their savings. This is because doing so would entail an opportunity cost, as it would entail forfeiting the security and protection that savings offer.
Accumulating savings is crucial for effectively managing the uncertainties of the future. Another scenario where borrowing is relevant is when acquiring a property, even in the context of a Bitcoin-based standard, as real estate purchases tend to be capital-intensive.
In a world where Bitcoin serves as accessible collateral, it is probable that credit availability will become significantly more widespread than it is presently. This, in turn, has the potential to foster increased productivity and efficiency within the global economy.
Conclusion
In summary, the adoption of a Bitcoin standard is poised to enhance the overall quality of life by virtue of deflationary tendencies that reduce expenses, coupled with Bitcoin’s role as a stable store of value, enabling individuals to save and amass wealth.
Under this scenario, the financial premium traditionally attributed to real estate will dwindle, aligning the asset’s value more closely with its utilitarian attributes. Consequently, capital that was once allocated to real estate investments will shift towards Bitcoin, while the increased affordability of housing will become a prominent outcome. As Bitcoin absorbs the monetary premium that real estate formerly enjoyed, the prevailing notion that “houses always appreciate in value, making them a secure investment” could be revised to recognize the potential for houses to become financial liabilities, juxtaposed with the prevailing confidence that “Bitcoin will consistently appreciate in value, making it a dependable investment.”
Furthermore, it is likely that interest rates will experience a significant uptick, mirroring the dynamics of the market more accurately. This adjustment will provide genuine price signals, facilitating a more natural and stable evolution of the market, thereby reducing the volatility associated with extreme boom and bust cycles.